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Japan’s Nuclear Disaster & Market Turmoil
March 15, 2011
By Peter C. Thoms, CFA
Founder, Orion Capital Management LLC
Dear Investors,
Global equity markets crave clarity and measurability. At the moment, the crisis at the Fukushima Daiichi Nuclear Power Plant is providing neither. The wrenching human cost of the earthquake and tsunami in Japan has transfixed our entire planet for the past several days, but these two events, as awful as they are, are also digestible by the markets since they are isolated, one-time events. Right now nervous marketsparticularly those in Asiaare focused on one thing: the situation inside the reactors at the Daiichi plant.
Assessments of the economic impact of the earthquake and tsunami have been floating around for days already, with insured losses expected to be around $35 billion and roughly 1 percentage point to be shaved from Japan’s 2011 GDP growth. Are these numbers precise? No. They are almost certain to be wrong, but the mere fact that they can be roughly estimated gives markets comfort.
The state of affairs inside three of the four reactors at the Daiichi plant at this writing on the morning of March 15, however, offers no such comfort. Radiation levels near the plant are alternatively said to be rising and falling and a clear picture of whether a meltdown has occurred at one or more of the reactor cores has yet to be presented. At least three explosions and a fire have also occurred at the plant. Simply put, the scope and severity of the environmental and economic consequences of this event are as yet unknown and Asian stock markets are pricing in a grim scenario. With gross domestic product of $5.5 trillion in 2010, Japan is the world’s third largest economy; a prolonged disruption there would certainly propagate around the world.
In the four trading days since the March 11 earthquake and tsunami, Japan’s benchmark Nikkei 225 index has lost nearly 20% of its value. The U.S. markets, however, actually closed mildly higher on the day after the earthquake. It was not until the Japanese revealed the situation at the Daiichi plant that U.S. stocks began to weaken.
During disastersnatural or man-madeequity markets follow a fairly predictable path. Immediately after a disaster strikes, selling begins. As more news, but no solution, comes out, stocks continue their decline. Finally, once the disaster is perceived to be containable and its long-term impact can be quantified, markets stabilize and investors’ risk appetite typically increases. The September 11th attacks provide a good example of how markets react to such events. In the ten days after September 11, 2001, the U.S. stock market dropped 12%. But if you had been unlucky enough to plunk all of your money into U.S. stocks on September 10, 2001, you would have recovered fully and been in the black in a mere six weeks.
The lesson here is that it rarely pays to sell into a panic. Ned Davis Research, a highly regarded institutional research firm, identified and investigated the stock market reactions to what it believed to be the 28 worst political and economic events from 1940 until 2001. The firm’s conclusion: in 19 of 28 cases, the Dow Jones Industrial Average was higher six months after each crisis began.
We are all gripped by the magnitude of the human tragedy in Japan right now, but these events are highly unlikely to derail the growth in emerging markets and the gradual economic recovery in developed markets.
Best Regards,
Peter
Peter C. Thoms, CFA
Orion Capital Management LLC
1330 Orange Ave. Suite 302
Coronado, CA 92118
Tel: 619.435-1701
Email: [email protected]
About the Author:
Peter C. Thoms, CFA, is the founder and managing member of Orion Capital Management LLC, an independent Registered Investment Advisor based in Coronado, California. The firm focuses on managing global equity accounts for both institutional and private clients.
Disclosure:
This document is for informational purposes only. Nothing in this report is to be construed as a specific investment recommendation. This document in no way constitutes the provision of investment advice, which is only provided by Orion Capital Management LLC under a written investment advisory agreement and only in states in which Orion Capital Management LLC is registered or is exempt from registration requirements.
